Musings on Economics, Finance, and Life

How Much Do The Health Bills Cost?

Everyone involved in the health care debate is waiting expectantly to see the Congressional Budget Office’s analysis of the newly-revised Baucus health bill. That estimate may arrive on Wednesday, which could allow a vote in the Senate Finance Committee as early as Thursday (but quite possibly later).

In preparation for that release, I have one simple request: Could everyone please take more care in characterizing the cost of the revised bill? And the cost of the other health bills?

To date, there has been much unnecessary confusion about the cost of the health bills now being discussed in Congress. Using the same budget estimates, observers often report very different figures for the same bill. When Senator Baucus unveiled the initial draft of his bill, for example, he described it as costing $856 billion over ten years, but many observers looked at the official cost estimate and concluded that the bill would actually cost $774 billion. The House Tri-Committee bill has generated an even larger range of claims. Some observers have characterized the bill as costing about $1 trillion over ten years, while others have pegged the cost at almost $1.3 trillion or more than $1.5 trillion.

Why do these figures vary so much? Because the health bills are trying to do many things:

Increase coverage through higher Medicaid spending and “carrots” such as subsidies for purchasing insurance through an exchange or tax incentives to get coverage.

Increase coverage through “sticks” such as penalties for individuals who don’t have coverage.

Prevent Medicare payment rates for doctors from being cut by more than 20% at the end of the year, as would happen under existing law.

Increase revenues by raising other taxes (e.g., new taxes on health providers, taxes on high earners, or reduced income tax deductions).

Reduce spending on federal health programs to pay for the other expansions (e.g., reduce provider payment rates and roll back Medicare Advantage).

When observers characterize the overall cost of the health bills, they must choose (whether they know it or not) which of these items to include.

That decision is easy for the last two items on the list since they are offsets that are otherwise unrelated to health insurance coverage. The confusion thus arises with the first five items on the list.

If observers want to characterize the total cost of the bills, they should include not only the cost of expanding coverage (category 1), but also any provisions that would increase other spending. In other words, the total cost of a bill includes items that address the Medicare doctor “fix” (category 3) or raise other federal health spending (category 4). Those are often overlooked, however, because the official cost estimates group those provisions together with items from category 7, the provisions that reduce health spending. To get to the right figures, observers need to dig into the details of the cost estimates.

If observers want to characterize the total cost of expanding coverage, they should focus solely on category 1, the new spending and subsidies that would expand the number of people who have health insurance.

If observers want to characterize the net cost of expanding coverage, they should combine categories 1, 2, and 5. The “stick” measures in category 2 should be included because they encourage individuals to purchase health insurance or encourage employers to provide insurance to their workers. However, they do so in a way that reduces the net cost to the government. The tax increases in category 5 should be included because they reduce coverage.

Participants in the health care debate should take much greater care in distinguishing those three measures of cost. In principle, cost estimates from the Congressional Budget Office include enough information to calculate each of them. In practice, however, exact figures may sometimes be difficult to calculate. To determine increases in other health spending, for example, one can identify each provision that increases spending and add those together to get a gross amount of new spending. But it may not be possible to determine how interactions among policies (which CBO often scores separately) should be betted against those provisions. Thus, there will be uncertainty about estimates of the total bill cost (as Senator Baucus discovered).

The following table illustrates these calculations for the Baucus bill and the House Tri-Committee bill:

As you can see, Chairman Baucus chose to emphasize the total cost of his proposal—$856 billion over ten years—when he unveiled it. That’s a laudable choice. The $774 billion figure, in contrast, refers only to the cost of expanding coverage.

Most commentary about the House health bill has focused on the net cost of expanding coverage, slightly more than $1 trillion. That’s fine if commentators are careful to distinguish that concept from the overall cost of the bill. That distinction is often lost, however, and the public may therefore have missed that the House bill, in its entirety, would cost more than $1.5 trillion over the next ten years for coverage expansions and the doctor fix. And the price tag rises to close to $1.6 trillion when other spending provisions are included as well.

As the health debate moves to its next stage, it is essential that observers and participants start to use apples-to-apples figures when comparing the bills.

Source of the numbers: Congressional Budget Office (here and here) and author’s calculations. Changes to employer insurance have indirect effects on tax revenues. If the indirect effect causes revenues to rise, those revenues are included in category 5; if those tax increase cause revenues to decline, they are included in category 1. In some cases, it is difficult to determine whether particular budget impacts are due to coverage expansions or other policies. The estimate of gross other spending for the Baucus bill is based on his original estimate of the total cost; the estimate for the House bill is based on individual health provisions that increase spending. Because of interactions and other factors, those figures are the most difficult for an outside analyst to calculate (in short, category 4 is an estimate based on the CBO reports).

[…] First, as I discussed yesterday, CBO’s estimates indicate that the bill would cost a bit more than $900 billion over the next ten years, not the $829 billion that most commentators are using. The latter figure reflects the costs of expanding coverage, but does not include other efforts — e.g., paying more to physicians under Medicare and expanding the Medicare drug benefit — that are also included in the bill. The $75 billion difference strikes me as important in itself, but the larger issue may well be how much additional spending is in the House bill. The previous version of the House bill was often described as costing about $1 trillion over ten years, but if you include all the new spending in it, the actual figure was north of $1.5 trillion. […]